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Downer EDI loses $360m BHP contract

Amanda Saunders

BHP Billiton is pulling back activity at its Goonyella coking coal mine in Queensland to avoid the operation slipping into the red, as the industry battles a sea of job losses and closures.

The miner on Tuesday night told Downer EDI that its contract for pre-stripping – which is the first step in preparing new mining areas within existing operations - at Goonyella Riverside would be terminated in September, almost two years ahead of its June 2016 expiry.

BHP Billiton Coal President Dean Dalla Vale said the move was "a further measure to ensure the long-term viability of BHP Billiton's coal business".

"The coal industry is undergoing a difficult transition and to be globally competitive we have to reset the cost base of the business," he said.

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"This will continue to play out over the near term and coal producers face challenging decisions to find the necessary step changes to create value for shareholders."

BMA is the country's largest metallurgical coal miner and exporter.

The contract price of premium hard-coking coal has fallen to $US120 a tonne in the June quarter from $US330 a tonne in 2011, while thermal coal prices have dropped to $US72 a tonne on the spot market from $US125 in mid-2011.

Mr Dalla Vale said the decision was "a continuation of cost reduction and productivity enhancement measures that have been underway at its BMA (subsidiary BHP Billiton Mitsubishi Alliance) for more than 18 months". The early termination will see 427 Downer EDI contractors stop work.

"Further measures to address wage and other costs are being undertaken at all mines in Queensland and NSW as we continue our detailed reviews of every aspect of our coal operations to ensure every operation remains operating cash positive."

He said the coal division had acted early to reduce costs and improve productivity with the closure of unproductive capacity at Norwich Park and Gregory mines in 2012 and widespread cost reduction measures across all operations over the past 18 months.

"Every operation has implemented productivity plans, which have resulted in record production at a number of mines."

Downer said the foregone works were worth about $360 million.

In an interview with the Financial Review last month, BHP and Rio Tinto warned the combination of high costs, high taxes and the strong Australian dollar has put a "vice-like grip" on the $60 billion coal industry that will force further mine closures and job losses this year.

About 12,000 jobs have been cut from the sector over the past two years amid a string of mine closures and delays to projects by companies ­including BHP, Rio, Glencore, Vale and Peabody Energy.

Downer says it is entitled to compensation for early termination of the contract. But it is understood the amount would not be material to BHP.

BHP said the move was "a further measure to ensure the long-term viability of BHP Billiton's coal business."